Knowledge Partners

August 22, 2016

E-Commerce Malaise: Is GMV or Valuation Expectation the Real Villain?

The Lessons E-Commerce Entrepreneurs & Investors Should Learn from their Microfinance Peers

In an article for Economic Times, Private Equity investor Vivek Singla points why blaming the measurement parameter Gross Merchandise Value (GMV) for the ills of the E-Commerce is not productive. He recommends E-Comm Entrepreneurs and Investors take a leaf out of how the Microfinance industry emerged from its regulatory crisis - by resetting their valuation expectations.

For the investors, one of the reasons behind the sharp reversal in sentiment is the build-up in bitterness against the GMV, with many now labelling it as a pure vanity metric...instead of being dismissive about the GMV and e-tailing at large, investors should augment the gross dollar spend with deep dive into the business performance. After all, GMV is an important component of the due diligence checklist, but not the only one.

...most international GMV based trailing multiples fall below 1×. On the other hand, the valuations for Indian unicorns were reported to have peaked out at around 2-3× trailing GMVs sometime last year, at significant premiums to those ascribed to the larger global counterparts. There is a good likelihood that the Indian multiples would converge with the global ones once the growth ebbs, leaving scope for further derating. For instance, Jabong was taken out for 0.5× last twelve months (LTM) revenue by Flipkart in July this year, much lower than the global LTM revenue multiples.

So, try as they may, the marketplaces wouldn’t be able to sidestep the valuation recalibration. But valuation crunches don’t have to be the poison pill for the industry. Take the microfinance example. The Andhra Pradesh crisis of 2011 had pushed the industry to the brink of closure. Had either the microfinance institutions not acquiesced to valuation downrounds in the aftermath of the event or the investors stopped believing in the business, microfinance would have become history. But sense prevailed and those who accepted the paradigm shift and realigned their focus on portfolio reconstruction and geographical expansion are reaping the rewards today.